The Tax Cuts and Jobs Act doubled the value of assets that can be transferred to an individual’s heirs without triggering federal estate or gift taxes over a lifetime. The new tax reform law, which temporarily increased the value of assets that can be transferred to $11.18 million for an individual and $22.36 million for a married couple in 2018, was welcome news to wealthy taxpayers. The IRS recently announced the 2019 estate and gift tax exemption limits to be $11.4 million for an individual and $22.8 million for a married couple.
However, estate planning professionals have been concerned about a sunset provision included in the law that reverts the increased thresholds to half of their current levels after 2025. The question has been whether the IRS would attempt to collect taxes on gifts already made under the doubled exemptions once the provision expired.
As an example, if a taxpayer gifted $10 million in 2018 and died in 2026, their exclusion would only be $5 million and the estate could be taxed on the $5 million in excess gifts. This has been called the “clawback” provision.
In issuing the proposed regulation on November 21, the IRS has clarified that individuals who provide numerous gifts to heirs will not owe retroactive taxes once the temporary provision expires. Under the proposed regulations, the estate tax credit is based on the greater of the credit at the time of the gift or the credit at the time of death.
In the example above, the estate would not be subject to additional taxes because the credit at the time of the gift ($10 million) is higher than the credit at the time of death ($5 million). In an accompanying statement, the agency stated, “Making large gifts now won’t harm estates after 2025.”
By eliminating the “clawback” provision, the IRS, in its proposed regulation, makes the estate and gift tax exemption a “use it or lose it” proposition.
Update: In November 2019, the IRS approved the final regulations confirming that it would eliminate the "clawback" provision.
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Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article..